But indexing giant says it isn’t increasing market’s choppiness Mary Evans/LUCASFILM/Ronald Grant/Everett CollectionDark side? Vanguard?(MarketWatch)—A widely-read Morningstar researcher has pointed out one possible “dark side of Vanguard’s success,” as he put it. The popularity of Vanguard-style investments—meaning mutual funds and ETFs that track conventional market indexes—has led to “increased volatility” and “marketplace fragility,” John Rekenthaler said in a column Thursday, quoting from a Financial Analysts Journal paper. Rekenthaler suggests he was “too benign” in writing about Vanguard a week earlier, when he said index investing “may eventually undercut itself” but “that time has not yet arrived.” The Morningstar researcher says one value investor, Red Pine Investment Counsel’s Don Andersen, complained in an email that the prior column was “grossly misleading.” “With respect to trading effects, Andersen’s skepticism about Vanguard’s growth—and the growth of market-cap indexing in general—would seem to be warranted,” Rekenthaler concedes. The Financial Analysts Journal paper, which was published in 2012, argues investors aren’t as safe holding a diversified portfolio as they used to be. “In short, the growth in trading of passively managed equity indices corresponds to a rise in systematic market risk,” the paper’s conclusion says. Authors Rodney Sullivan from the CFA Institute and James Xiong from Morningstar add: “From this finding, we can infer that the ability of investors to diversify risk by holding an otherwise well-diversified U.S. equity portfolio has markedly decreased in recent decades.” Other research papers over the years also have weighed in on index-tracking funds and their effects on volatility, with one finding that stocks held by ETFs show greater intraday choppiness. A Vanguard spokesman on Friday disputed Rekenthaler’s latest column. The company believes claims “associating market volatility to indexing in general and Vanguard in particular are unfounded,” the spokesman, John Woerth, told MarketWatch in an email. “In fact, over the past several years, market volatility has been lower as the index approach [has] gained popularity.” The CBOE Volatility Index VIX, +0.48% or VIX, has been around 15 over the last couple of years and well below levels hit during the financial crisis, Woerth said. Woerth also emphasized that index investing isn’t as big as some investors might think it is. Index trackers have been estimated to account for 14% of equity funds and 3% of fixed-income funds on a market-capitalization basis, he said, citing a prior Vanguard blog post on the subject. Unlike other financial giants, Vanguard doesn’t get associated that frequently with dark forces. The Malvern, Pa.-based company is known for its nonprofit-like structure and distancing itself from Wall Street. Read more: 5 things you don’t know about Vanguard Vanguard pioneered the use of low-cost funds that track indexes weighted by market capitalization like the S&P 500 SPX, +0.66% The company continues to see its customers flock to such investing vehicles, even as competitors tout smart-beta ETFs, which are products that track newer, alternatively weighted indexes. Regarding cap-weighted index funds, Rekenthaler noted that he was mostly wrong a week ago to suggest that such funds don’t help drive stock market prices, crediting Red Pine’s Andersen for calling him out.